Description

The market is pricing in a near-term bankruptcy filing by ATP Oil and Gas (ATPG). The stock has fallen 40% in the last two days since Bloomberg reported that a group of bondholders was interviewing advisors. The bonds in question are The ATPG 11.875% second lien notes of 2015, which currently trade at 38.5. I believe these notes are attractive at this level for a number of reasons:

The assets more than cover the notes at par, and even a draconian valuation suggests only a 25% loss of principal from this level

I think the notes would trade up on news of a Chapter 11 filing

If the company doesn’t file, the large coupon provides buyers at these levels with a current yield of 31% while they wait

The enterprise value through the notes, as currently priced, is roughly $2.1 billion dollars. The 2011 year-end PV10 value of the proved reserves alone is $4.2 billion, but for a number of reasons that provides little comfort to the bondholders – and not without good reason.

REASONS FOR UNDERVALUATION:

ATP’s entire capital structure has always been “cheap” as compared to the PV10 value of its proved reserves. The company’s business model is to acquire undeveloped offshore reserves that are non-core to larger companies and develop them. The idea is that ATPG won’t have to spend money on risky exploration and can create a lot of value by bringing forward production from these discoveries. There are a number of problems with this model - and this company - that have led to a perpetual “undervaluation” when compare to the value of the reserves.

The majority of the PV10 value is in proved undeveloped reserves (PUDs). This means there is a lot of operational risk and capital cost involved in actually bringing these reserves onto production at some point in the future

The company operates primarily in the North Sea and in the deep water Gulf of Mexico, which adds another layer of operational risk as well as regulatory risk

Management is either very unlucky or they are not good operators

The Chairman/CEO and founder, Paul Bulmahn owns 12% of the stock. He has resisted any attempts to reduce leverage at the expense of diluting his ownership

Bulmahn stepped down as CEO two months ago and Matt McCarroll from Dynamic took the job . . . for about a week before resigning after “failing to reach an employment agreement”

Bondholders are rightly concerned by these risks. The biggest danger to bondholders may be that Bulmahn runs the company into the ground trying to maximize the value of his substantial shareholding (which is down 95%). Rather than issue equity, the company has funded their substantial capital needs by selling net profits interests (NRIs), overriding royalty interests (ORRIs), pipelines and other infrastructure. Not only do these obligations substantially muddy the capital structure, but they are senior to the 2015 notes. Rather than continue to be subordinated by complex and expensive methods of financing, I think holders of these notes should welcome a Chapter 11 filing. Despite my favorable view, the notes traded at an all-time low today.

VALUATION:

The company’s assets consist of offshore oil and gas reserves as well as substantial infrastructure which is used to produce these reserves. In addition to the proved and probable reserves in the Gulf of Mexico and North Sea, ATP has an exploration prospect in the Israeli deep water that may contain a trillion cubic feet of gas net to them.

Reserves:

At year-end 2011, ATP had proved reserves with an SEC PV10 value of $4.2 billion (66% oil). Adding probable reserves takes this number to $7.3 billion. I break this down into three categories:

Proved Developed Producing (PDP) reserves: As the name implies, these are reserves that are in production. This is essentially an income stream that is easy to value and is subject only to operational hiccups.

Proved Undeveloped (PUD) reserves: These are reserves that have been discovered, but someone needs to complete (and possibly drill additional) production wells and hook them up to a production facility (which may or may not be in place). The PV10 value of these reserves is the present value of the project if you spent all the money to bring them onto production, everything goes roughly as planned, and you have a 10% cost of capital.

Probably reserves: These are just like PUD reserves, except that they may not exist.

Obviously some haircut is needed for the PV10 value of the PUD and probable reserves. The good people at JP Morgan have been nice enough to provide a PV10 at the current oil and gas strip for the proved reserves broken out by category.

($ millions)

U.S. Proved Developed Reserves

$1,041

U.S. Proved Undeveloped Reserves

$1,527

North Sea Proved Developed Reserves

$1

North Sea Proved Undeveloped Reserves

$591

YTD adjustment (add PUD capex, subtract PDP cash flow)

$127

Total:

$3,287

At the current strip, the PV10 value is not what it once was due to falling oil prices. The leverage to oil prices is one of the bigger risks to this investment and has a huge impact on the PV10 value. The values above are as good of a snapshot as we are going to get, but they are by no means exact. If you think oil is going to $70, stop reading now.

PROVED RESERVE VALUE

($ millions)

JPM

Base Case Haircut

Value

Bear Case Haircut

Value

U.S. PDP

$1,041

0%

$1,041

25%

$781

U.S. PUDs

$1,527

50%

$764

65%

$534

North Sea PUDs

$591

65%

$207

80%

$118

YTD adjustment

$127

0%

$127

50%

$64

Base Case Total:

$2,138

Bear Case Total:

$1,497

ATP also has substantial probable reserves that have real value. They have sold the deep rights on a number of their leases for tens of millions of dollars and could likely sell probable reserves. I value these at zero to be conservative, but I will note that management does have a decent track record of converting probable reserves to proven. I also value their Israeli prospect at zero, but note that their first well encountered 62 feet of natural gas pay. There is some optionality to these assets, but I don’t think either is worth betting on or paying for.

Infrastructure:

ATP owns two large offshore production platforms in the Gulf of Mexico; the ATP Titan and the ATP Innovator. They have a third facility, the “Octabuoy” under construction in China with deployment in the North Sea planned for 2014. They also have other minor infrastructure, pipelines, and an interest in 14 offshore platforms. From the 10k:

“The floating production facilities have longer useful lives than the underlying reserves and are capable of redeployment to new producing locations upon depletion of the reserves. Accordingly, they are expected eventually to be moved several times over their useful lives.”

The Titan is encumbered by a secured loan facility, and the Innovator has been dropped down into a joint venture called ATP infrastructure partners (ATP-IP) or which ATP owns half and GE purchased the other half for $150 million. The company has spent about $492 million on construction of the Octabuoy and will need to spend another $210 million to complete it (payment of the remainder is not due until 2013-2014). I value these assets as follows:

The ATP Titan and its related infrastructure have a net book value of $1,105.9 million as of year-end 2011. I value this asset at 55% of net book, or $608 million. There is a secured loan facility attached to this asset with the full amount of $318 million borrowed against it (which I deal with in the liabilities section) which I think is a very conservative low-case value

I value ATP’s 51% interest in ATP-IP (The ATP Innovator) at $150 million just like GE did

I value the Octabuoy at half of the $492 million that has been spent thus far, as a rough approximation of what it could be sold for at this point

In my “bear case”, I haircut all of these assets a further 50%:

INFRASTRUCTURE ASSET VALUE

($ millions)

Base Case

ATP Titan and related infrastructure

$608

51% ownership in ATP-IP (ATP innovator)

$150

Octabuoy

$246

Base Case Total:

$1,004

Bear Case at 50% of above:

$502

Valuing the Probable assets at zero in both cases, I think that the “base case” below is both reasonable and conservative. I have a tough time imagining the assets could be worth less than my “bear case” numbers unless Brent Crude falls another $20 (and ATPG is decently hedged for the next twelve months).

TOTAL ASSETS

($ millions)

Base Case

Bear Case

Proved Reserves

$2,138

$1,497

Probable Reserves

$0

$0

Infrastruture Assets

$1,004

$502

Base Case Total:

$3,142

Bear Case Total:

$1,999

Liabilities:

ATP has a $362 million first lien term loan and another $312 million borrowed in the “ATP Titan Facility”. The company also has $594 million in “Other Long-term Obligations”, as well as a working capital deficit and asset retirement obligations that all come before the Second Lien Notes. The “Other” obligations are as follows:

March 31, 2012

($ millions)

Net profits interests

$299

Dollar-denominated overriding royalty interests

$214

Gomez Pipeline obligation

$71

Vendor deferrals - Gulf of Mexico

$15

Vendor deferrals - North Sea

$104

Other

$3

Total:

$706

Less current maturities:

($111)

Total:

$594

The net profits interests (NPIs) are basically debt backed by current oil and gas production. ATP promises the investor (or vendor in some cases) a specified rate of return on a specified principal amount, to be paid out of a specified percentage of the production from certain PDP assets. If the wells are shut-in or production otherwise stops, the juice keeps running, but the company has no obligation to make payment. These are generally short term and $190 million was expected to be repaid in the next 12 months as of March 31

The dollar-denominated overriding royalty interest (DDORRI) is essentially the same thing. These are similar to credit card debt in both payment terms and the implicit interest rate. $160 million of this was expected to be repaid in the next 12 months as of March 31

The Gomez pipeline was sold for $74.5 million in 2009. ATP agreed to continue to use the pipeline with set fees and monthly minimums. The purchaser has the options to return the pipeline (and any related asset retirement obligation) to ATP at the end of the useful life. This is considered a financing transaction due to these terms, but I believe this was really a sale and that a much smaller liability (for potential monthly minimums, above market rates and eventual retirement) is appropriate. In my “base case” I discount this liability by $50 million

The Vendor deferrals are pretty self-explanatory. Some of their vendors allow them to delay payment until first production.

The “current maturities” show up in the working capital deficit

I assume that of the $350 million of NPIs and DDORRIs expected to be paid by March 31, 2013, $100 million has already been paid. Under this assumption, “other” obligations fall to $494 million. In my base case this falls an additional $50 million for the Gomez pipeline:

TOTAL LIABILITIES SENIOR TO THE 2015 NOTES

($ millions)

Base Case

Bear Case

First Lien term loan

$362

$362

ATP Titan Facility

$312

$312

"Other" obligations

$444

$494

Asset Retirement Obligations (AROs)

$119

$119

Net negative working capital

$268

$268

Base Case Total:

$1,505

Bear Case Total:

$1,555

Below the Second Lien Notes in the capital structure, there is $35 million of convertible unsecured debt (added June 20th from one investor), $311 million face value of 8% convertible preferred stock and then the common.

RECOVERY ANALYSIS

Base Case

Bear Case

Total Assets

$3,142

$1,999

Liabilities Senior to the 2015 Notes

($1,505)

($1,555)

remaining value:

$1,637

$444

Recovery %

Second lien Notes:

$1,495

100.0%

$444

29.7%

Unsecured Convertible note:

$35

100.0%

$0

0.0%

Convertible preferred:

$107

34.4%

$0

0.0%

Common Equity value

$0

$0

A NOTE ON THE PREFERRED SHARES:

Interestingly, my base case suggests a 34% recovery for the convertible preferreds. The convertible preferreds (ATPGP) carry an 8% dividend payable quarterly in cash or stock. They have never missed a dividend payment, and the last 10Q stated that they expect to continue paying these dividends in cash. The preffereds traded down to $6.00 per share today (they are $100 par value) and the next dividend is in two months. I think this is too cheap:

Bulmahn seems hell-bent on preventing dilution and will likely do anything in his power to prevent a Chapter 11 filing

If he is successful in raising more funds through royalties or a sell-down of the infrastructure assets, I believe they will keep paying the preferred dividend

The current yield is 133% at $6.00 per share, and just one or two quarterly dividends will substantially reduce the cost basis if purchased here

There is clearly a valuation argument to be made for the Prefs if they do file, and this “nuisance” value would likely be worth the current price

It is worth noting that the preferred share issue has a face value of $311 million and now has a “market cap” of only $19 million, while the common stock has a market cap of $73 million. The preferreds convert to 4.5 shares of stock – a conversion price of $1.33, which is lower than where the common shares closed today!

While you probably cannot borrow the stock, you can sell Jan 2013 $2.50 calls (these were $0.22 bid at the end of the day). Doing this would recoup an additional $1.00 per preferred share without any risk.

Additionally, for those investors who can purchase term loans, I believe the First Lien term loan is trading in the high 90s and carries an interest rate of 9%. One half of 1% of the principal must be paid down quarterly. I think this is a very safe ~10% yield.

LIQUIDITY:

The company essentially has no liquidity, which is why the bondholders have hired an advisor. The company will either need to creatively raise money, or they will not make it past the next interest payment on the notes at the end of November – if that long. They have discussed selling down either the Octabuoy, the Cheviot field it is destined for, or both. They should have material production coming online in October or November, but they will still need to raise money elsewhere.

I beleive purchase of the preferred shares in tandem with the 2015 notes provides and interesting hedge against the company staving off Chapter 11 once again.

If anyone is more familiar with the name and has a thought on the assets or liabilies, let me know. I have heard grumblings about the consultants who value their reserves, but I think that is priced in. Apologies for any errors, it's getting a little late.

Catalyst

Chapter 11 filing or other restructuring

Large coupon while you wait

sort by

Description

The market is pricing in a near-term bankruptcy filing by ATP Oil and Gas (ATPG). The stock has fallen 40% in the last two days since Bloomberg reported that a group of bondholders was interviewing advisors. The bonds in question are The ATPG 11.875% second lien notes of 2015, which currently trade at 38.5. I believe these notes are attractive at this level for a number of reasons:

The assets more than cover the notes at par, and even a draconian valuation suggests only a 25% loss of principal from this level

I think the notes would trade up on news of a Chapter 11 filing

If the company doesn’t file, the large coupon provides buyers at these levels with a current yield of 31% while they wait

The enterprise value through the notes, as currently priced, is roughly $2.1 billion dollars. The 2011 year-end PV10 value of the proved reserves alone is $4.2 billion, but for a number of reasons that provides little comfort to the bondholders – and not without good reason.

REASONS FOR UNDERVALUATION:

ATP’s entire capital structure has always been “cheap” as compared to the PV10 value of its proved reserves. The company’s business model is to acquire undeveloped offshore reserves that are non-core to larger companies and develop them. The idea is that ATPG won’t have to spend money on risky exploration and can create a lot of value by bringing forward production from these discoveries. There are a number of problems with this model - and this company - that have led to a perpetual “undervaluation” when compare to the value of the reserves.

The majority of the PV10 value is in proved undeveloped reserves (PUDs). This means there is a lot of operational risk and capital cost involved in actually bringing these reserves onto production at some point in the future

The company operates primarily in the North Sea and in the deep water Gulf of Mexico, which adds another layer of operational risk as well as regulatory risk

Management is either very unlucky or they are not good operators

The Chairman/CEO and founder, Paul Bulmahn owns 12% of the stock. He has resisted any attempts to reduce leverage at the expense of diluting his ownership

Bulmahn stepped down as CEO two months ago and Matt McCarroll from Dynamic took the job . . . for about a week before resigning after “failing to reach an employment agreement”

Bondholders are rightly concerned by these risks. The biggest danger to bondholders may be that Bulmahn runs the company into the ground trying to maximize the value of his substantial shareholding (which is down 95%). Rather than issue equity, the company has funded their substantial capital needs by selling net profits interests (NRIs), overriding royalty interests (ORRIs), pipelines and other infrastructure. Not only do these obligations substantially muddy the capital structure, but they are senior to the 2015 notes. Rather than continue to be subordinated by complex and expensive methods of financing, I think holders of these notes should welcome a Chapter 11 filing. Despite my favorable view, the notes traded at an all-time low today.

VALUATION:

The company’s assets consist of offshore oil and gas reserves as well as substantial infrastructure which is used to produce these reserves. In addition to the proved and probable reserves in the Gulf of Mexico and North Sea, ATP has an exploration prospect in the Israeli deep water that may contain a trillion cubic feet of gas net to them.

Reserves:

At year-end 2011, ATP had proved reserves with an SEC PV10 value of $4.2 billion (66% oil). Adding probable reserves takes this number to $7.3 billion. I break this down into three categories:

Proved Developed Producing (PDP) reserves: As the name implies, these are reserves that are in production. This is essentially an income stream that is easy to value and is subject only to operational hiccups.

Proved Undeveloped (PUD) reserves: These are reserves that have been discovered, but someone needs to complete (and possibly drill additional) production wells and hook them up to a production facility (which may or may not be in place). The PV10 value of these reserves is the present value of the project if you spent all the money to bring them onto production, everything goes roughly as planned, and you have a 10% cost of capital.

Probably reserves: These are just like PUD reserves, except that they may not exist.

Obviously some haircut is needed for the PV10 value of the PUD and probable reserves. The good people at JP Morgan have been nice enough to provide a PV10 at the current oil and gas strip for the proved reserves broken out by category.

($ millions)

U.S. Proved Developed Reserves

$1,041

U.S. Proved Undeveloped Reserves

$1,527

North Sea Proved Developed Reserves

$1

North Sea Proved Undeveloped Reserves

$591

YTD adjustment (add PUD capex, subtract PDP cash flow)

$127

Total:

$3,287

At the current strip, the PV10 value is not what it once was due to falling oil prices. The leverage to oil prices is one of the bigger risks to this investment and has a huge impact on the PV10 value. The values above are as good of a snapshot as we are going to get, but they are by no means exact. If you think oil is going to $70, stop reading now.

PROVED RESERVE VALUE

($ millions)

JPM

Base Case Haircut

Value

Bear Case Haircut

Value

U.S. PDP

$1,041

0%

$1,041

25%

$781

U.S. PUDs

$1,527

50%

$764

65%

$534

North Sea PUDs

$591

65%

$207

80%

$118

YTD adjustment

$127

0%

$127

50%

$64

Base Case Total:

$2,138

Bear Case Total:

$1,497

ATP also has substantial probable reserves that have real value. They have sold the deep rights on a number of their leases for tens of millions of dollars and could likely sell probable reserves. I value these at zero to be conservative, but I will note that management does have a decent track record of converting probable reserves to proven. I also value their Israeli prospect at zero, but note that their first well encountered 62 feet of natural gas pay. There is some optionality to these assets, but I don’t think either is worth betting on or paying for.

Infrastructure:

ATP owns two large offshore production platforms in the Gulf of Mexico; the ATP Titan and the ATP Innovator. They have a third facility, the “Octabuoy” under construction in China with deployment in the North Sea planned for 2014. They also have other minor infrastructure, pipelines, and an interest in 14 offshore platforms. From the 10k:

“The floating production facilities have longer useful lives than the underlying reserves and are capable of redeployment to new producing locations upon depletion of the reserves. Accordingly, they are expected eventually to be moved several times over their useful lives.”

The Titan is encumbered by a secured loan facility, and the Innovator has been dropped down into a joint venture called ATP infrastructure partners (ATP-IP) or which ATP owns half and GE purchased the other half for $150 million. The company has spent about $492 million on construction of the Octabuoy and will need to spend another $210 million to complete it (payment of the remainder is not due until 2013-2014). I value these assets as follows:

The ATP Titan and its related infrastructure have a net book value of $1,105.9 million as of year-end 2011. I value this asset at 55% of net book, or $608 million. There is a secured loan facility attached to this asset with the full amount of $318 million borrowed against it (which I deal with in the liabilities section) which I think is a very conservative low-case value

I value ATP’s 51% interest in ATP-IP (The ATP Innovator) at $150 million just like GE did

I value the Octabuoy at half of the $492 million that has been spent thus far, as a rough approximation of what it could be sold for at this point

In my “bear case”, I haircut all of these assets a further 50%:

INFRASTRUCTURE ASSET VALUE

($ millions)

Base Case

ATP Titan and related infrastructure

$608

51% ownership in ATP-IP (ATP innovator)

$150

Octabuoy

$246

Base Case Total:

$1,004

Bear Case at 50% of above:

$502

Valuing the Probable assets at zero in both cases, I think that the “base case” below is both reasonable and conservative. I have a tough time imagining the assets could be worth less than my “bear case” numbers unless Brent Crude falls another $20 (and ATPG is decently hedged for the next twelve months).

TOTAL ASSETS

($ millions)

Base Case

Bear Case

Proved Reserves

$2,138

$1,497

Probable Reserves

$0

$0

Infrastruture Assets

$1,004

$502

Base Case Total:

$3,142

Bear Case Total:

$1,999

Liabilities:

ATP has a $362 million first lien term loan and another $312 million borrowed in the “ATP Titan Facility”. The company also has $594 million in “Other Long-term Obligations”, as well as a working capital deficit and asset retirement obligations that all come before the Second Lien Notes. The “Other” obligations are as follows:

March 31, 2012

($ millions)

Net profits interests

$299

Dollar-denominated overriding royalty interests

$214

Gomez Pipeline obligation

$71

Vendor deferrals - Gulf of Mexico

$15

Vendor deferrals - North Sea

$104

Other

$3

Total:

$706

Less current maturities:

($111)

Total:

$594

The net profits interests (NPIs) are basically debt backed by current oil and gas production. ATP promises the investor (or vendor in some cases) a specified rate of return on a specified principal amount, to be paid out of a specified percentage of the production from certain PDP assets. If the wells are shut-in or production otherwise stops, the juice keeps running, but the company has no obligation to make payment. These are generally short term and $190 million was expected to be repaid in the next 12 months as of March 31

The dollar-denominated overriding royalty interest (DDORRI) is essentially the same thing. These are similar to credit card debt in both payment terms and the implicit interest rate. $160 million of this was expected to be repaid in the next 12 months as of March 31

The Gomez pipeline was sold for $74.5 million in 2009. ATP agreed to continue to use the pipeline with set fees and monthly minimums. The purchaser has the options to return the pipeline (and any related asset retirement obligation) to ATP at the end of the useful life. This is considered a financing transaction due to these terms, but I believe this was really a sale and that a much smaller liability (for potential monthly minimums, above market rates and eventual retirement) is appropriate. In my “base case” I discount this liability by $50 million

The Vendor deferrals are pretty self-explanatory. Some of their vendors allow them to delay payment until first production.

The “current maturities” show up in the working capital deficit

I assume that of the $350 million of NPIs and DDORRIs expected to be paid by March 31, 2013, $100 million has already been paid. Under this assumption, “other” obligations fall to $494 million. In my base case this falls an additional $50 million for the Gomez pipeline:

TOTAL LIABILITIES SENIOR TO THE 2015 NOTES

($ millions)

Base Case

Bear Case

First Lien term loan

$362

$362

ATP Titan Facility

$312

$312

"Other" obligations

$444

$494

Asset Retirement Obligations (AROs)

$119

$119

Net negative working capital

$268

$268

Base Case Total:

$1,505

Bear Case Total:

$1,555

Below the Second Lien Notes in the capital structure, there is $35 million of convertible unsecured debt (added June 20th from one investor), $311 million face value of 8% convertible preferred stock and then the common.

RECOVERY ANALYSIS

Base Case

Bear Case

Total Assets

$3,142

$1,999

Liabilities Senior to the 2015 Notes

($1,505)

($1,555)

remaining value:

$1,637

$444

Recovery %

Second lien Notes:

$1,495

100.0%

$444

29.7%

Unsecured Convertible note:

$35

100.0%

$0

0.0%

Convertible preferred:

$107

34.4%

$0

0.0%

Common Equity value

$0

$0

A NOTE ON THE PREFERRED SHARES:

Interestingly, my base case suggests a 34% recovery for the convertible preferreds. The convertible preferreds (ATPGP) carry an 8% dividend payable quarterly in cash or stock. They have never missed a dividend payment, and the last 10Q stated that they expect to continue paying these dividends in cash. The preffereds traded down to $6.00 per share today (they are $100 par value) and the next dividend is in two months. I think this is too cheap:

Bulmahn seems hell-bent on preventing dilution and will likely do anything in his power to prevent a Chapter 11 filing

If he is successful in raising more funds through royalties or a sell-down of the infrastructure assets, I believe they will keep paying the preferred dividend

The current yield is 133% at $6.00 per share, and just one or two quarterly dividends will substantially reduce the cost basis if purchased here

There is clearly a valuation argument to be made for the Prefs if they do file, and this “nuisance” value would likely be worth the current price

It is worth noting that the preferred share issue has a face value of $311 million and now has a “market cap” of only $19 million, while the common stock has a market cap of $73 million. The preferreds convert to 4.5 shares of stock – a conversion price of $1.33, which is lower than where the common shares closed today!

While you probably cannot borrow the stock, you can sell Jan 2013 $2.50 calls (these were $0.22 bid at the end of the day). Doing this would recoup an additional $1.00 per preferred share without any risk.

Additionally, for those investors who can purchase term loans, I believe the First Lien term loan is trading in the high 90s and carries an interest rate of 9%. One half of 1% of the principal must be paid down quarterly. I think this is a very safe ~10% yield.

LIQUIDITY:

The company essentially has no liquidity, which is why the bondholders have hired an advisor. The company will either need to creatively raise money, or they will not make it past the next interest payment on the notes at the end of November – if that long. They have discussed selling down either the Octabuoy, the Cheviot field it is destined for, or both. They should have material production coming online in October or November, but they will still need to raise money elsewhere.

I beleive purchase of the preferred shares in tandem with the 2015 notes provides and interesting hedge against the company staving off Chapter 11 once again.

If anyone is more familiar with the name and has a thought on the assets or liabilies, let me know. I have heard grumblings about the consultants who value their reserves, but I think that is priced in. Apologies for any errors, it's getting a little late.

Catalyst

Chapter 11 filing or other restructuring

Large coupon while you wait

Messages

Subject

Structurally senior claims

Entry

07/28/2012 02:16 AM

Member

gs0709

I am no restructuring/BK specialist, so I would like to know why are ORIs and NPIs considered structurally senior to Senior Notes in Ch11? As they're predicated on ongoing production from curtain wells, wouldn't the company shed those obligations in Ch11? Are you speculating/assuming that those claims are senior, or this is a fact?

Subject

RE: Structurally senior claims

Entry

07/28/2012 11:55 AM

Member

ncs590

Thanks for the question. My understanding is that both the NPIs and DDORRIs are basically veriable term ORRIs. The overriding royalty interest is a royalty on the actual production and it has been sold.

Probably a more accurate way of looking at it is to reduce the PDP asset by the amount of these interests that have been sold out of it. Because of the way that they are structured, the company accounts for them as financial transactions instead.

I think its possible that some of the vendor deferrals would not be senior to the notes, although in the case of the payments due for the Octabuoy, this is a work in progress that the vendor is in possession of. I don't believe the Gomez pipeline sale liability is neccesarily senior to the notes or conceptually correct in the accounting. Some of the net negative working captial may also be subordinated.

While it may be correct to adjust the "other" liabilities down further, I would note than management is probably working very hard to add to this category as we speak, and that their working capital position has likely deteriorated further.

With regard to NPIs and DDORRIs - these are basically sales of the comapany's best assets and settled oil and gas law would prevent any clawback in bankruptcy. For this reason the First Lien Term Loan indenture prevents the sale of more than 20% of the PDPs in this manner. I wouldn't be concerned about these "liabilities" going up dramatically and cramming down the notes.

Subject

Double counting assets?

Entry

07/28/2012 02:10 PM

Member

aagold

Thanks for the write-up. Interesting idea.

One thing that concerns me, however, is that you're adding the infrastructure value to the proved reserve value, and to some extent I think that's double counting. The present value of the reserves is calculated using production costs that are possible only *because* of owning these infrastructure assets. Obviously this present value calculation would have come out markedly different if the capital required to construct these assets had been taken into account. So adding the infrastructure value to the PV-10 reserve value has some conceptual challenges.

Having said that, I do think the infrastucture does deserve some incremental value above and beyond the reserve value because of what you quoted from the 10-k, which is that the infrastructure has a longer userful life than the reserves and can be redeployed. You're already applying a ~50% discount to net book value even in your base case, which seems fairly conservative, but I'm just not sure what is the best way to think about this. By the way - how does that deal with GE's 50% interest in ATP-IP work? Since ATPG is presumably the only operator using that infrastructure right now, does that mean they now have to pay GE for the right to use that infrastructure for production? Doesn't that affect the PV-10 value of their reserves since the production costs are now higher than they used to be?

Anyway, here's one way to think about this whole infrastructure+reserves double counting issue. First of all, I think it's necessary to estimate how long the reserves will last assuming that the PUDs you're assigning value to are all drilled, so that requires an estimate of how long it will take to develop these PUDs using cash flow from operations. Then you can estimate the *future* sale value of the infrastructure assets (after the assets are much older and have been depreciated) and discount to present value (at a 10% discount rate, for example). This way, there's no double counting - the infrastructure sale value is realized only after the reserves have been depleted and the resulting cash flow has been discounted to present value.

- aagold

Subject

RE: Double counting assets?

Entry

07/28/2012 03:02 PM

Member

ncs590

Thanks for the question aagold.

You bring up a valid concern, but I don't actually think this is double counting. While they couldn't produce their reserves if these assets were not in place, they don't neccesarily have to own them. These are production platforms, which I think are similar conceptually to a pipeline - you can't produce without being hooked up to a pipeline, but you don't need to pay for it yorself or own it. ATP believes that ownership of these assets is a competitive advantage, but ownership isn't a neccesary condition.

The ATP Innovator was dropped down into ATP-IP, which is 49% owned by GE and controlled by ATP through their general partnership interest. It looks like ATP currently pays $26.6 million per year to ATP-IP for use of the platform (basically a throuput per barrel charge, although this agreement also has daily minimums). Due to the terms of the ATP-IP agreement, I believe all of this money goes to GE until they have recouped their outlay. After that ATP has exclusive right to the revenues for a term and then they split it.

While ATP doesn't account for revenues in this manner, the company should essentially pay a per barrel fee to the platforms for volumes produced (essentially what happens at ATP-IP). If they paid $5 per barrel and accounted for this seperately, it wouldn't have a tremedously deleterious affect on the PV10 values. The Innovator and Titan are both operating well below capacity, so there is the possibility of being paid to produce volumes for other companies that operate in the area.

I don't think it makes sense for a company with a high cost of capital like ATP to own these assets. Chesapeake energy was in a similar situation, where they believed that substantial ownership and control of their midstream pipeline assets was a competitive advantage. CHK has since sold these assets for $4 billion. In the current yield-starved investment environment, I believe these assets are much more valuable to a different owner.

These assets would have a lot more current value if there was a lot more production flowing through them and selling them would probably be difficult, but I think the haircut I give these assets accounts for this.

Subject

RE: RE: Double counting assets?

Entry

07/28/2012 03:45 PM

Member

aagold

ncs,

Hmmm.... something doesn't seem to quite right here. If I understand your answer properly, I think you're basically saying that if they sold all of their infrastructure, just like they sold 50% of ATP-IP, the impact on the present value of the cash flows generated by their proved reserves would be pretty small. I seriously doubt that. If that were really true, then why on earth would *anybody* own billions of dollars worth of infrastructure when they could just sell it, give the proceeds to shareholders as a special dividend, and not have their reserve values and cash flow generation capability change significantly? That just doesn't pass the sniff test... I can certainly believe that companies with a high cost of capital would be better off selling their infrastructure assets and accepting the resulting increase in production costs, which of course implies significant reduction in reserve value, but there's no way you can sell of the infrastructure assets and leave everything else pretty much as it was.

Having said all the above, I think it helps your case that you're already haircutting the infrastructure assets quite a bit. But it's not clear to me that your haircuts are as large as they'd be if you used the present-value of future sale price method I described previously.

Also, it sounds like you haven't taken into account any degradation in PV-10 value that's already happened due to the $150M sale to GE. Doesn't something seem wrong with that to you? You're basically saying that ATPG got a $150M gift from GE and it didn't have any effect on the value of their proved reserves.... that doesn't pass the sniff test either.

- aagold

Subject

RE: RE: RE: Double counting assets?

Entry

07/28/2012 05:28 PM

Member

ncs590

aagold,

I understand your concern, and this is why I think the distinction that these are production platforms is important. These are like pipelines - they are long-lived toll assets with excess capacity - and just as other companies can hook up to ATP's platforms and pay a toll, ATP could sell them and pay a toll to the new owner.

the Gomez hub (ATP Innovator) produced 2,983,000 million boe in 2011. ATP paid ATP-IP $26.6 million, which works out to an average "toll" of $8.92 per boe. This sounds high, but this hub was operating at less than 1/3 of capacity. I think that assuming $5 per barrel as a "toll" is reasonable.

If this were the case, and ATP sold the Titan platform and henceforce paid a toll of $5 per barrel, it would probably lower the PV10 value of the associated reserves by less than 10% (they have gross margins per boe of about $65 currently).

Thinking about it from the opposite direction, if ATP and/or other companies paid for the use of the full capacity of the Titan and Innovator platforms (it is important to note that both platforms are operating at only about 1/3 of capacity), these assets would be collecting a daily "toll" of $375,000 or $137 million per year. As an MLP yielding 10% and assuming $37 million in annual maintenance, these two hubs would be worth $1 billion. Leveraging them in this structure would add aditional value. I value these two hubs at 38-76% of that value.

With regard to the GE sale, I assumed that the PV10 has already been adjusted to account for the cost of paying ATP-IP. If this is somehow not the case - which I seriously doubt - then you can adjust down their PV10 value by 4% (26% of PDP reserves being sold for a gross margin that is 14% lower). This adjustment would come before any haircut I put on the assets.

If the company doesn't go bankrupt, I think they will be able to get additional financing by selling down their ownership in these assets. My valuation assumes this value is $190-$692 million (my values minus the $312 million ATP Titan Facility term loan). I think this is a reasonable estimate of what they could actually sell their remaining interests for. I believe they are working on a large financing deal backed by the Octabuoy.

If the company does go bankrupt, I think these assets could be sold outright. I think there is a very good argument to be made that they are worth their net book value of $1.5 billion plus. In a bankruptcy, I think my valuation of $502-$1,004 million is also reasonable and relevant.

If you have some other calculation or estimate of their worth please share it.

thanks

Subject

RE: RE: RE: RE: Double counting assets?

Entry

07/28/2012 07:20 PM

Member

aagold

Well, you've grabbed my interest enough that I'm going to spend some time researching this idea. I'm interested in learning more about the value of these infrastructure assets and in seeing how much excess capacity they have. If you're correct that there's enough *excess* capacity (above and beyond what's required for ATPG's own PDPs and PUDs) for these assets to generate $100M of FCF - even though they've already sold 50% of ATP-IP to GE - then that's certainly of interest. One thing I'm wondering right off the bat though: are there enough other operators close enough to the Titan and Innovator platforms, given their current location, that this excess capacity can be tolled at a fair price? Do you have a list of potential companies that are constrained by their current production capacity and may be interested in such a tolling arrangement? If it really is possible to simultaneously (a) produce ATP's own PDP and PUD reserves and (b) sell the *excess* capacity under a tolling arrangement, then I agree that there's no double counting and that the value of this excess capacity clearly should be taken into account. You said, "If the company doesn't go bankrupt, I think they will be able to get additional financing by selling down their ownership in these assets". Can you give any more detail? Has this option been discussed by management?

Besides this whole infrastructure/reserves double counting concern, the other major issue I see with your valuation is the PUDs value. The booked PUDs only have their claimed value if they're drilled instantaneously with 100% drilling success. That's presumably why you've applied a 50% (base case) and 65% (bear case) discount. I'm not sure what kind of discount is typical for this type of offshore asset, but in the valuation work I did for EQU I found that a 75% discount to claimed NPV/well was more appropriate as a *base* case valuation, so your discount is significantly more optimistic. It seems to me that the most obvious way to value the PUDs is to figure out how much ATPG paid for them when they originally bought them, as a percentage of stated NPV/location (given whatever commodity price assumptions were reasonable at that time). You mentioned at the beginning of your write-up that ATPG's whole corporate strategy is to buy PUDs from larger companies that consider them non-core. Well, I have a feeling that if you check out how much ATPG was willing to pay in comparison to the PV-10 claimed by the seller, you may find that your discounts are too optimistic.

Subject

infrastructure and PUD questions

Entry

07/29/2012 06:56 PM

Member

ncs590

With regard to the potential for additional monetizations of infrastructure assets, management said the following on the last earnings call

- that they were in talks with a bank or banks in China to get enough funding to complete the Octabuoy ($210 million) and pay other costs to get it installed in the Cheviot field in the North Sea in 2014. This financing would be secured by the Octabuoy itself. They said specifically "It will be a project financing loan with a subsidiary, very similar to what we did with the Titan."

- they also talked about selling down their interest in the Cheviot field itself, saying: "Yes, that's – we're continuing to pursue that; having some success, closings will – will take some time, but we're working it in pieces. And I think third and fourth quarters, being optimistic we should be able to get some of that done."

- "There is also the possibility and it's not guaranteed by any means, either within the Titan or within the Octabuoy or within any other infrastructures. We may bring in true equity partners in that infrastructure later this year or into 2013. I think most people that know me have always wanted to figure out a way to have some form of subsidiary that owns all the iron. I think that would be a huge benefit for us."

- "We have some partners that are interested in potentailly a side-by-side with ATP., equal investment in the Octabuoy as well as an equal investment in the resevoir. And we have one entity we've spoken to that's having interest only in the Octabuoy and would want to invest just in the iron itself with the throuput agreement"

Management doesn't have a lot of credibility, but these transactions would make sense and would prevent a bankruptcy filing. They should have more production coming online in November, so if they can make it that far they would be in a lot better shape.

With regard to the PUDs, the PV10 value of the PUDs is based on current investment plans to put these volumes online. It doesn't assume they are drilled instantaneously, although ATP has not done a great job of meeting their timelines in the past. I don't have information on what they paid for for most of the PUDs, but they have invested hundreds of millions of dollars in them after purchase.

Anecdotally, the value can change dramatically based on commodity prices. ATP paid only $232 thousand to lease the Entrada field in March of 2010 after the previous owner let the lease lapse. In 2007, when gas prices were higher, Callon Petroleum paid $190 million to buy 80% of this prospect from BP. Callon subsequently sold 50% of Entrada for $175 million to CIECO, who also loaned them $150 million on a non-recourse basis to fund development of the field.

Another anecdotal piece of evidence is Apache's 2010 purchase of Mariner Energy for $4 billion. It looks APA paid about $1.2 billion for Mariner's Permian Basin acreage, and the other $2.8 billion for their offshore Gulf of Mexico operations (which were gassier than ATP). These offshore properties had a PV10 value of just $1.01 billion, of which $910 million was PDP.

Neither of the above examples helps us get to a value for ATP's PUDs, but they do show that others are willing to acribe a lot of value to these types of assets.

Subject

RE: infrastructure and PUD questions

Entry

07/29/2012 09:29 PM

Member

aagold

In regard to the reliability of making an investment largely on the basis of PUDs, have you ever checked out what happened to Cano Petroleum (CFW)? Here's what appeared to be a sound analysis, except that 79% of the stated PV10 were PUDs:

Let's just say that this investment thesis didn't play out quite as expected...

Any reason to believe ATPG is a totally different case?

Subject

RE: RE: infrastructure and PUD questions

Entry

07/29/2012 09:38 PM

Member

sugar

Mariner seems more appropriate, given the size/type of assets than Cano. Cano's assets were much more similar to another mid-con company that was discussed at length already on VIC (rhymes with sequel).

Also, reserve reports deduct expected f&d and loe costs. And when equipment is owned, fair market rates are used in assumptions for those costs. So sale of the infrastructure, as long as its contracted back by ATP at market rates, should not affect proved value. The only thing that would affect proved would be if the assets were sold and used elsewhere, and it became likely the puds weren't going to be drilled in the next 5 years, and then they would get bumped down to probable.

NCS, I think this is a compelling write up. The bonds should do well and the preferred is intriguing. Good job digging through a complex capital structure and finding value. I think given management's track record of pulling rabbits out of hats, even in the worst of times (managed to do a sale in early 09 to save the company, despite extremely low oil prices and no liquidity), plus asset value, makes this a trade potentially worth putting on.

Subject

RE: RE: RE: infrastructure and PUD questions

Entry

07/29/2012 10:46 PM

Member

aagold

sugar,

Are you saying that a company that owns all of its own production infrastructure, which obviously causes its production costs to be lower than one without it and therefore has to pay per-boe costs to someone else, has to report its PV10 *as if* it didn't own its production assets? I find that hard to believe.

Also, I find it kind of amusing that you think this is a compelling investment case, given that not only is it based almost *entirely* off of PV10 values in a *reserve report*, but in addition, said reserves are 67% PUDs. I find that interesting since you've said previously that basing any investment decision off of reported reserve values makes no sense, even when the investment thesis is based almost entirely off of PDPs rather than PUDs, and where the incremental value of any owned infrastructure is assumed to be zero. Hmmm...

- aagold

Subject

RE: Owning the equity in NewCo

Entry

07/30/2012 03:10 PM

Member

ncs590

Thanks for the question ndn. I'm not a restructuring expert by any means, and I would really appreciate other people's thoughts if they are more knowledgeable.

As a conceptual jumping off point, I think they would have to imediatelly abandone the Cheviot/Octabuoy if they filed. This project will probably need another $400 million in Capex (half for Octabuoy, half for the field) before first production in 2014. This would require a much bigger DIP and would almost surely lead to a lower recovery for all the creditors (and no chance of equity recovery for management). If management gave up on their current equity and was instead looking to cut a deal with the noteholders for a chunk of the NewCo, the noteholders would also demand abandonement of this project.

I'm not sure the above is correct, but its the only thing that makes sense to me. Assuming they could sell the Octabuoy for $250 million (half the amount invested) and completely abandone Cheviot, that would still come in above my "bear case" for these two assets. Does anyone have a thought as to why management or anyone else would try to go forward with this if they were forced to file?

An obvious corrollary is that management should be willing to sell-down their interest in Octabuoy/Cheviot right now at almost any price, in order to avoid BK.

Assuming they are going to sell this project, Capex needs would fall to $50 million per quarter. This should be close to their cash generation capacity net of the ORRI/NPIs and assuming that Clipper never comes online. In this case I think a small DIP of $150 million would be sufficient. There would also be a substantial amount of cash coming in the door from the sale of Octabuoy in this case.

Lets assume the First Lien lenders provide the DIP and provide an additional $140 million. This would take the size of the FL/DIP to $500 million and the interest rate would probably rise from the current 8.5% to 15% when you take into account fees etc. This wouldn't be a tremendous rise in interest costs.

What do people think of this scenerio? does this sound reasonable, or does someone have a different thought?

Subject

Israel and recent unsecured convert

Entry

07/30/2012 03:34 PM

Member

ncs590

Bloomberg is reporting this morning that ATPG's Shimson well in the Israeli deepwater (which encountered only 62 feet of net gas pay) was flow tested at a rate of 40.2 mmcf/day over 54 hours. This is a better result than I would have expected. ATPG owns 40% of this multi-Tcf prospect.

I still don't ascribe any value to this prospect, but I think this test may make it possible for ATPG to sell their interest in order to generate liquidity. I would look favorably on selling this asset for $50 million.

I would also point out that, for whatever it is worth, a "single institutional investor" bought a $35 million unsecured 8% convertible. This was at the money, so the implied warrant was probably worth half of that value, but at least one person was willing to put money in "under" the notes one month ago.

Subject

potential liquidity sources

Entry

07/30/2012 04:48 PM

Member

ncs590

I agree that it would be very difficult to sell something here in the zone of insolvency, but I think they could borrow money against Octabuoy/Cheviot in order to make it to the end of the year.

Subject

RE: Collateral Package questions

Entry

07/30/2012 05:18 PM

Member

ncs590

NDN,

I think you are right about the 2nd lien and what it does and does not encompass, but I've already put all of the first liens and negative working capital ahead of these notes.

Assuming that the notes don't recover par+accrued from the 2nd lien and end up with a GUC claim for the rest, do you see a large pool of other GUC claims? I believe these notes would still be senior to the $35 million unsecured note, but if they aren't it wouldn't change much.

I'm not sure this would be a problem, but I am no restructuring expert

NCS

Subject

reply to Utah

Entry

07/30/2012 06:45 PM

Member

ncs590

Utah,

I think the ATP Innovator financing with GE was basically a sale-leasback. Looking at that transaction, GE paid $150 million for a 49% interest in this platfrom AFTER they got paid their $150 million back (all cashflow currently goes to GE)

I didn't realize this when I did the initial work on Friday. This means two things:

1) my base case infrastructure values should be lowered by about $75 million dollars to account for the structure of this transaction. (I think ATP's equity in ATP-IP is worth $35-75 million)

2) I believe the Innovator only cost at ATP about $150 million ($80 million to buy the rig plus conversion costs), so they effectively recieved 100% financing.

3) this gives a blueprint for how something like this could be financed. The ATP Titan is a two-year-old $650 million dollar facility with an expected useful life of 40 years. While there is currently $312 million in secured debt attached to it, in a bankruptcy I think this asset could either be sold and leased back, or sold in conjunction with an agreement for minimum throuput and tolling. I am assuming this facility (plus a couple hundred million worth of piplines and subsea equipment) is worth somewhere between $304 million and $608 million in my analysis.

I agree that these assets couldn't be sold to be sent to a different field somewhere without impairing the reserves, but I do think there is the potential to sell them to someone with a cheaper cost of capital in a chapter 11 filing and essentially lease them back, as they have effectively already done with the Innovator.

Subject

reply to Mack

Entry

07/30/2012 07:45 PM

Member

ncs590

mack,

Do you have any thoughts on the value of the Octabuoy work-in-progress or why they wouldn't be able to borrow against it? I agree that the current situation doesn't seem to make it more likely.

The reserve auditor is a concern, but I think my low-end value can be justified by current production assuming that Clipper comes online at some point.

I don't think there is a danger of management securing a huge DIP because there aren't a ton of assets to secure it with, and I don't think anyone would do it on an unsecured basis. I would look for the First Lien lenders to provide an additional $150 million or so and look to roll their existing debt into the DIP.

ncs

Subject

reply to ndn86

Entry

07/31/2012 10:17 AM

Member

ncs590

I only see $1.9 million in noncancelable operating leases in the 10K. There is another $3.6 million of trade committments. I think just about anyone who would have a claim has already gotten in front of the notes.

With regard to the reduction in "other non-current liabilities", I reduced this by $100 million to account for the amount of NPIs and ORRIs that should have been paid down in the quarter through cashflow.

I should have also added to the negative working capital balance for at least $100 million of expenditures (capex and bond interest minus receipts from unsecured note). You are correct that the net affect is a wash and my recoveries should be lowered by $100 million in both cases.

I also note that there is potentially $100 million in NOLs if they aren't wiped out by changes of control.

Subject

reply to mip14

Entry

07/31/2012 11:13 AM

Member

ncs590

1) I wouldn't expect any real recovery for the preferreds in a bankruptcy, but I did want to make the point that they could make a reasonable argument and possibly get warrants or a portion of the new equity just to get them to go away. If the company survives, the preferreds could have substantial value, and if they keep on getting dividends (which are a relatively minor cost) the yield here is tremendous. I wouldn't bet on this, but I think that is what buyers at these levels are counting on.

2) I'm not sure I understand the question. As currently priced, the equity implies an enterprise value that is $350 million dollars higher than what is implied by the preferreds at current prices. At the time of my write-up, (the preferreds are up 100% since then and the common is up only 5%) the preferreds were trading at conversion parity with the equity, but were much higher in the capital structure, which suggested a high-return riskless arbitrage was possible, assuming you could short the common . . . It sounds like you might be suggesting the opposite trade, which I would not suggest.

Subject

story on debtwire

Entry

08/08/2012 03:34 PM

Member

ncs590

The noteholders have apparently hired Wachtell

Management is allegedly working with Credit Suisse to arrange a DIP

The DIP is expected to be $600 million, which would include a roll-up of the first lien term loan

"The DIP proposal from Credit Suisse includes a mandate that the company hire a chief restructuring officer, said the first and the third source. Pitches for selecting a CRO are already underway."

It sounds like they could file before reporting Q2. I think the mandate to have a CRO is very positive for noteholders and substantially lowers the risk of management betting the farm on Cheviot with a larger DIP.

Subject

RE: material non public info on debtwire

Entry

08/08/2012 04:24 PM

Member

ncs590

I guess they are just reporting on rumors . . .

after the bloomberg story, everyone knows the note holders were interviewing advisors. I don't think that a source suggesting a potential DIP size is material.

Subject

RE: RE: material non public info on debtwire

Entry

08/08/2012 04:34 PM

Member

GideonMagnus

Is Debtwire just a news agency or do they provide some form of investment advice? WSJ and NYT routinely report material information on M&A, imminent bankruptcy filings, etc. from their "undisclosed sources". If it's okay for them, then it's probably okay for Debtwire.

Subject

RE: RE: RE: material non public info on debtwire

Entry

08/08/2012 04:54 PM

Member

ncs590

I was suggesting it wasn't material because it was basically a rumor from an unnanmed source. Considering the state of the company, I think its fair to assume that their advisor, Jeffries, would discuss DIP financing in case they can't get some type of financing.

I don't think an unnamed source suggesting a size and potential provider of the DIP crosses the threshold of materiality here. I would still think that management is attempting a last ditch effort to get $100 million or more of high-cost first lien borrowing against the Octabuoy and that its possible they don't file.

This is certainly a good data point and one I think is worth mentioning, but I don't think it materially changes the investment case. After hearing this news, are you 100% confident that the company is going to file in the near term and that CS will provide the DIP at the terms discussed?

Subject

RE: DIP size

Entry

08/08/2012 09:13 PM

Member

ncs590

Mack,

It sounds like the large DIP might be used to fund early retirement of the NRI's and ORRIs, which would be very positive as those obligations carry implied interest rates in the high teens.

I the note holders are in the drivers seat this could be by good news. If management is handed $250 million and given a year it would be very bad, but it doesn't sound like that is in the cards.

Subject

RE: RE: flowing bpd comps

Entry

08/09/2012 11:25 AM

Member

ncs590

ndn86,

I think $50k is reasonable, but I beleive decline rates in the deepwater are higher (I think Dynamic was mostly on the shelf). This probably equals out with being oilier.

IHS Herold just put out a report valuing the Cheviot project based on four recent smaller comparable transactions. None of these transactions is a perfect comp by any means, but they come up with a value of $8.94-$12.52 per boe of 2P reserves. I think this is a reasonable price for a non-distressed seller and gives a value for the project of $500-$700 million (which would include selling the Octabuoy work in progress).

My low and high cases for Cheviot+Octabuoy is $241-453 million. If they filed today with the DIP as proposed, I would expect a CRO to try to 363 this project - especially in light of the fact that it will take another $700 million to develop it. I would think they could get at least $300-400 million and remove a lot of risk and uncertainty in doing so.

This sale would be large enough to remove BK risk right now if they sold, but I'm not sure why a buyer wouldn't just wait until they file. Maybe management would sell it today for $300 million in order to be able to hold on to the company. This would not be terrible for bondholders, but obviously management is a big negative.

ncs

Subject

Bloomberg announces ATP is "said" to obtain DIP

Entry

08/10/2012 01:33 PM

Member

ncs590

stock just went straight down $0.30 cents and hit a circuit breaker. Looks like the file over this weekend.

Subject

preferred

Entry

08/10/2012 02:28 PM

Member

ncs590

Gideon,

I would not be buyer of the Pref here.

I put this idea on the VIC to get feedback from others who know the name better and would adjust my valuation accordingly.

I am probably $75 million too high on the valuation of the Innovator, and probably too optimistic on the Titan as well. There are valid concerns about their resevoir evaluation consultant as well, although I don't think this is too big of a deal and I am heavily discounting everything.

I would wait to see what the DIP looks like and who is in charge. The preferreds are likely worthless and are owned by the same people who own the bonds, so they probably won't be lining up to fight for the prefs. At $0.50 or so, I might pick some up as a call option on $100 WTI in the next year, but other than that I wouldn't be in any hurry.

I think everything trades lower before the bonds go back up. I wouldn't be in a hurry, BK isn't even official yet.

ncs

Subject

RE: RE: Structurally senior claims

Entry

08/15/2012 05:34 PM

Member

gs0709

I did some digging around it and here's what I've read in multiple sources: ORIs are VPPs and are protected in bankruptcy, i.e. they are considered seperate real property interest and not a part of the filing company estate. NPIs don't get that treatmen and in fact have no protetction in bankruptcy UNLESS they're recognized as real property interests in the state where they were written.

In the case of ATPG, the $300m question is - which state were their NPIs written in and what is the law in that state in regards to NPIs.

Subject

RE: RE: RE: Structurally senior claims

Entry

08/16/2012 10:12 AM

Member

ncs590

gs,

I need to read through the NPI documents if they are available, but wouldn't the NPI's have a first lien anyways?

ncs

Subject

RE: RE: RE: RE: Structurally senior claims

Entry

08/16/2012 01:25 PM

Member

gs0709

I am not sure what the answer to that question is, but it is not obvious to me. I view them as unsecured claims the question is whether they're a part of the estate or not. The lawyers I asked can't give a straight answer as the devil is always in details, but I think it would be crazy on the part of bondholders to not try to challenge the seniority of those liabilities. There's nothing curtain in the bankruptcy court though. In the meantime:

TM Energy Holdings LLC and GMZ Energy Holdings LLC — both controlled by Perella — claim that they paid millions for the right to receive royalties and profits on wells ATP is developing in the Gulf of Mexico, but have stopped receiving payment from the financially <troubled company>

--

dont have access to the full article, but the jist of it is ATPG defaulted on NPIs.

Subject

RE: Projections - 18 months

Entry

08/20/2012 12:02 PM

Member

ncs590

I believe the "outside owner distributions" are the ORRIs. This would make sense because they ramp up when Clipper is expected to come online in November and ATP previously sold an ORRI on Clipper for $100 million in March of this year.

I think "term related production payments" must be the NPIs. They are projecting "term related production payments" of $445 million over the next 18 months. I believe there are only $300 million of NPIs on the balance sheet, but I think they have an implied interest rate in the high teens, which would get the number most of the way to $445. Month 4 would seem to include an extra $15 million, which I assume is the GOM vendor deferral. This still seems a little high though . . . does anyone have another thought or a different interpretation?

Subject

RE: Recovery

Entry

08/22/2012 10:05 AM

Member

ncs590

They talking about these notes. They write "senior secured notes", which I think means "senior notes secured by a second lien"

The first lien debt will be taken out by the DIP once it is approved.

Subject

RE: RE: RE: Recovery

Entry

08/22/2012 03:44 PM

Member

ncs590

I think the PV10 is meaningless for a few reasons:

1) their reserves are evaluated by Collarini and associates using input from management - neither of which is terribly credible

1) the majority of the PV10 value is in proved undeveloped (PUD) reserves and probable reserves. The undeveloped reserves will require substantial costs and operational risks (as shareholders have seen over time) to bring onto production. 10% is not the appropriate discount rate. I do think there is actually value in the probable reserves attached to their current fields, but for the other probable reserves, it is even murkier than the PUDs

Subject

Updated Valuation

Entry

08/22/2012 03:54 PM

Member

ncs590

I've updated my valuation to take into account some more facts as well as more appropriately look at the assets which these notes have an actual lien on:

I value the GOM reserves and production based on $50-60k/flowing boe and assuming midpoint production of 30k boe/day over the next 18 months, assuming Clipper comes online.

I think ATP-IP is probably worth $200 million, but GE gets preferential payments of $100 million first, so I value ATP's 51% at $50 million. I have lowered my estimate of equity in ATP Titan to account for the low production there. It looks like they are selling the North Sea assets in their entirety and I estimate they will get $200-$350 million, but there is potential upside here.

ATP Assets secured by first and second liens:

($mms)

low

midpoint

high

GOM reserves/production:

$1,500

$1,625

$1,750

Equity in GOM infrastructure:

50

89

128

65% of foreign subsidiaries:

130

190

250

total:

$1,680

$1,904

$2,128

Additional value that falls to the GUC pool:

($mms)

low

midpoint

high

35% of foreign subsidiaries:

$70

$102

$135

Potential legal claims:

0

$17

34

total:

$70

$119

$169

Liabilities senior to the second lien notes ($mms)

DDORRI's and NPIs:

$489

Pre-paid swaps:

$73

Gomex Pipeline obligations:

$37

GOM Vendor Deferrals:

$30

First Lien Term Loan

$366

total:

$995

Recovery analysis of Second Lien Notes:

($mms)

low

midpoint

high

Assets secured by second lien:

$1,680

$1,904

$2,128

Liabilities senior to second lien:

(995)

(995)

(995)

$685

$909

$1,133

Recovery before bankruptcy costs:

46%

61%

76%

Assumed changes in liabilities over the 12 months:

($mms)

New DIP money plus fees:

$275

Bankruptcy costs at $3 million per month

36

Interest on DIP:

62

Payment of NPIs and DDORRIs:

(350)

Additional interest on NPIs and DDORRIs:

72

Settlement of pre-paid swap:

(66)

net increase in liabilities:

$29

It looks like there are about $200 million of GUC claims, so the notes should get the lions share of the ~$120 million of value there. I assume there will be a rights offering before they emerge from chapter 11.

Two potential sources of upside (that I think are unlikely) are a claim from BP or the NPIs being rejected as executory contracts. Assuming that Clipper comes online as planned, they should be in pretty decent shape - or as much so as one can be when their Second Lien paper is expected to return 60 cents on the dollar.

Subject

RE: Updated Valuation

Entry

08/22/2012 03:57 PM

Member

ncs590

Also, with regard to the GOM reserves, another way to value them would be based on comparable transactions for proved and probable reserves. $20 per boe of proved reserves seems to be a reasonable metric based on recent transactions in the deepwater GOM, which suggests a value of $1.5 billion and change. Adding $5 per boe of probable reserves takes this amount up to $1.7 billion - roughly in line with the valuation based on flowing boe.

Subject

RE: RE: RE: Updated Valuation

Entry

08/22/2012 05:42 PM

Member

ncs590

Production is currently 20k boe/day but will go up to ~36 boe/day when/if Clipper comes online in November. They should also be increasing production at Gomez with $90 million from the DIP being allocated on spending there. I figure ~30k boe/day is a decent estimate of run-rate production going forward. Valuating this at $50-60k per daily boe puts a value of $1.5-$1.8 billion on the GOM (which I assume includes AROs)

In 27 recent transactions surveyed by IHS Herold, the median price paid for proved reserves was $21.25/boe, but I caution that these things are all over the map and none of the assets are truly comparable. The best comp is probably Inpex's purchase of 7.2% of the Lucius discovery from Anadarko. They paid $25.74 per boe of "recoverable resource" for this field that won't come online until the second half of 2014. I think using $20/boe is reasonable for ATP given that they have a decent amount of production and a lot of the reserves are near their hubs. At 75.9 million boe of proved reserves in the GOM, $20/boe suggest a value of $1.52 billion.

UK is not sold. It looks like it is for sale and that they are not funding it, so I assume it will be sold. It needs to be sold, because the last thing this company needs right now is that moneypit. IHS Herold estimated that it could be worth $500-700 million (including the Octabuoy), but I think that is very optimistic. I assume they can sell the Octabuoy for $150 million (half of what they have put into it) and sell the entire North Sea area including $20 million of PDP reserves for another $50 million. This gets me to $200 million for the UK asset on the low-end, which I think is reasonable and achievable. If anyone actually wants the project, they might get more like $300-400 million.

Subject

RE: RE: Updated Valuation reply to Miser

Entry

08/22/2012 05:47 PM

Member

ncs590

Miser,

I throw out the PV10 and value the fields based on either reserves or production. I value what little equity ATP has in the infrastructure seperately.

I don't believe they are paying especially onerous costs to use the infrastructure, so I don't believe that there is double counting or that the reserves or production values should be discounted because they use it.

ncs

Subject

RE: liabilities senior to second lien??

Entry

08/23/2012 11:16 AM

Member

ncs590

Good question Otto, sorry that I wasn't clear on that point.

In my initial write-up I looked at all of the assets and all of the liabilities, but after researching the capital structure more I have made some changes to this:

I no longer count the value of the ATP Titan as an asset and the subtract the $312 of secured debt. Instead I only count the "equity in ATP Titan" as an asset worth $0-$78 million.

Similarly, I now seperate out all of the North Sea assets including the Octabuoy that is being built in China. The subsidiaries that own these asset have not defaulted and I believe they are for sale. There is $104 million of "vendor deferrals" at this subsidiary, which I no longer count as a liability of the company. Similar to the treatment of the ATP Titan, I have tried to value the equity in the entire North Sea group of assets, which means netting assets and liabilities at that level.

Those two changes account for a $416 million decline in my measure of liabilities. I also adjust down the DDORRIs and NPIs to use the current figure from bankrupcty filings.

As far as BK costs, I am assuming $36 million for lawyers plus another $25 million in fees for the DIP (origination fees plus $4 million or so for Netherland Sewell). This takes my figure for bankruptcy costs to $61 million. Sorry if this wasn't clear.

ncs

Subject

RE: Titan

Entry

08/24/2012 10:01 AM

Member

ncs590

Sure Miser, this is definately an asset I struggle to value.

I believe it cost $650 million to build Titan, and another $450 million to get it hooked up and add other infrastructure in the Telemark field. I may actually be low on the cost of Titan itself, although these costs might be a little high to start with because ATP constructed it in the US.

Given that day rates for deepwater equipment are hitting records, I would think that Titan could be sold tommorow for close to replacement cost. Unfortunately, as other's have pointed out, Titan is needed to produce ATP's reserves in the Telemark field. Moving Titan would impare the value of those reserves severely, because production would cease and future production would be pushed out years into the future.

The PDP PV10 at Telemark is $610 million, so moving Titan is a non-starter.

Judging from the ATP-IP deal, it seems like $6.50 per boe is probably a reasonable tolling fee to pay to a platform like this if you didn't own it. This is important because ATP could sell Titan (if it is worth more than the debt attached to it), or take on other "clients" in the area. At the current rate of production at Telemark - which I figure is about 10,000 boe/day, this would result in revenue to the platform of only $23 million per year. This would not support the current valuation (or current interest payments on the secured loan).

There is 33,333 boe/day of capacity at the platform (and PUD reserves in the field with a PV10 of $1.8 billion). If ATP can double production, then I think the platform on its own - to say an MLP or someone like that - would be worth probably 8X revenue, or $368 million. If they tripled production, either from their own wells or others in the area, the value could be $552 . . . although that certainly isn't going to be happening in the next 18 months.

I think there is a lot of optionality to Titan, but they can't move it, so the replacement cost or value it would have in a different location is moot. If I was required to keep it in the Telemark Field, I wouldn't pay more than $200-$250 million for Titan today, which is less than the debt it secures. I would imagine that the lenders know this - but they also know that they are effectively secured by Telemark too.

ATP will be paying down the Titan loan $5 million per month during bankruptcy, so when they emerge it should be down to $250 million or so, which I think is fair estimate of value ($0 equity). If they have visibility into bringing more wells online or Netherland Sewell agrees with Collarini about the massive PUD PV10 in the area, then I certainly think it could be worth more. I don't think it could be sold for a whole lot more though.

If it can't be moved and it can't be sold for the amount of debt attached to it, I can't see any way to ascribe much equity value here - even if the replacement cost is $800 million.

On a side note, the bonds are trading flat at 28, suggesting a 64-170% return to my revised recovery estimates. I would love to hear from someone selling them here or otherwise waiting for lower prices. My thesis is dependent on oil staying above $80 or so and on Clipper actually coming online this year. Other than those two (not insignificant) risks, what concerns do people have with the bonds at these levels?

thanks,

ncs

Subject

reply to jgalt

Entry

08/24/2012 01:36 PM

Member

ncs590

with regard to the North Sea assets, there are a number of reasons I use a low valuation:

1) Other than about $20 million worth of PDP reserves, it is all undeveloped with expected first production from Cheviot still 18 months out.

2) There is a less favorable tax structure in the North Sea

3) I think ATP is a forced seller of this asset and there are probably not a ton of potential buyers, so I think $200-$350 million is a reasonable estimate of what they could get.

4) Due to the tax environment, North Sea 2P reserves seem to trade closer to $10-12/boe. This would imply $550-$660 million for the North Sea Assets. Considering $500 million has been spent (including Octobuoy), but another $700 million in spending is needed, I think my estimate is reasonable.

With regard to the lien on 80% of the GOM assets, it is actually a lien on "at least 80%". This is what allows for the NPIs and DDORRIs. Once they are netted out, they have a lien on the whole thing (but the first lien term loan comes first). Because the NPIs and DDORRI's have a claim on the best assets (the producing reserves), I don't think you can look at it in terms of what you are paying per boe at the current bond price.

Thanks for the info on IB

ncs

Subject

reply to ndn

Entry

08/24/2012 02:04 PM

Member

ncs590

ndn,

I share your concerns and I don't think the fact that the NPI and DDORRI's have ~18% interest costs is properly accounted for. This obviously also affects the appropriateness (or lack theirof) of PV10 values.

I think I have gotten around the PV10 problem by re-valuing the assets a few messages below based on production and reserves.

My understanding of the 18 month cashflow forcast provided by management is that the "outside owner distributions" are actually ORRIs. This is a 5% ORRI that NGP Capital bought last month on the Telmark Field as well as a 15% ORRI they sold on Clipper. I think these are permanent ORRIs, and as such the associated reserves and production amounts should be off ATP's books.

The "Total Term Related Disbursements" is the NPIs and DDORRIs (the $489 million). They anticipate paying $334 million over the next 12 months and a total of $444.7 million over the next year. Assuming that at the end of 12 months they will have accrued $72 million in interest (18% * $400 mil), the principal will be down to $227 million. ($489-334+72)/

I think JGalt is correct that the DIP should help insure that these are paid down as quickly as possible.

I understand your concern that the NPI/DDORRI liability seems to be higher than it shoul be right now, suggesting some sort of scary unknown (higher interest rate than we realize, wierd terms). I think the actual reason for this is that cashflow was much lower than anticipated over the last few months (Shell shut down their pipeline for a month, etc), and I think management may have added to the figure in Q2, although I'm having trouble finding a reference to this right now.

I think that we can project the key elements of the balance sheet with a lot of certainty IF we assume that Clipper comes online as planned and there are no catostrophic failures elsewhere. I'm not sure how big of an if that was. I would assume 90% chance that Clipper is online by the end of November. If anyone has a thought or a better way to estimate the timely completion of Technip laying a 16 mile deepwater pipeline, please chime in.

ncs

Subject

NewCo

Entry

08/24/2012 02:22 PM

Member

ncs590

I wanted to come up with a basic framework for what this company will look like after Chapter 11. My current thought is:

1) things go roughly as planned in management's cashflow projections

2) they sell the North Sea/Octabuoy for $200-$350 million and walk away from the whole thing

3) they emerge in one year

4) $250 million in new equity is injected (backstopped by second lien holders). 90% goes to Second Lien notes with the rest going to other GUCs

5) The DIP should be down to $550 at that point, and I assume $150 million of the new money is used to pay it down to $400, which will be the size of the new FLTL (hopefully at less than 9.5% this time).

6) Noteholders are given $500 million in new unsecured debt as well as 90% of the equity.

Assuming the above, they should have $150-200 million in cash on hand for working capital, $230 million in NPI/DDORRIs still at the front of the line (lets call it $250 million worth to simplify and account for higher interest for one last year).

I estimate normalized EBITDA to be about $350 million per year (over the next 18 months it will average closer to $430 million per year, but will be falling off in 12 months without further investment).

At 5 times EBITDA of $350 million, the enterprise would be worth $1.75 billion, suggesting an equity value of $700 million and total value to the notes of $905 million ($500 million in debt plus $630 million worth of equity minus $225 million new cash injected).

This scenerio suggests a recovery of 60% and a one year return of ~130% (the notes are now at 26).

I am not a bankrupcty specialists, so if anyone thinks part of the above is unreasonable or too optimisitic (or just wrong) please suggest adjustments.

ncs

Subject

RE: RE: reply to ndn

Entry

08/24/2012 08:33 PM

Member

ncs590

I agree, and frankly think the previous round should be challenged (the ~$165 or so in Q1), as the bonds were clearly pricing in a large amount of distress. It would be nice to have a larger DIP to take out these obligations, but I think Collarini and associates probably scared people away.

Subject

RE: RE: NewCo

Entry

08/27/2012 02:59 PM

Member

ncs590

Thanks for the comments.

It looks like the deepwater/offshore comps trade around 3.5 times EBITDA, but I was pusposefully using a low number for EBITDA. If I use the actual average run-rate for the next 18 months of $430 million at 3.5 times I get an enterprise value of $1.505 billion.

If we assume that there are $250 million in NPI/DDORRIs remaining, and the DIP is down to $550 million:

I don't see any reason they couldn't get $200 million minumum for North Sea + Octabuoy (whose topsides can be modified to process greater capacity). Assuming a $200 million rights offering (if needed), the company should have $450-500 million in cash in one year.

Lets assume they pay the dip down to $350 million (which will turn into a new FLTL at ~5%), this leaves them with $250-300 million in cash, and $600 million in FLTL +NPI/DDORRI.

In this scenerio the notes, net of what was put in in the rights offering would be worth $700 million, or a recovery of 50 cents on the dollar. This doesn't include the large amount of cash that can be used to maintain/grow production.

Assuming $350 million in forward EBITDA at a 3.5 multiple still suggests that the notes would be worth $425 million (net of $200 million rights offering) or roughly 28. I think this would be dirt cheap for a company with oily production, new competent management, selling into the Brent market, with $250 million in cash and a lot of PUDs.

I think the biggest risks to my thesis are:

1) that the North Sea and Octabuoy are worthless. I think this is unlikely, and my $200 million low end is pretty draconian. I'd love to hear if someone thinks they are worth even less for some reason.

2) that Netherland Sewell decides the PUDs are worthless for some reason. I don't think you are paying much for them here, but maybe the cost of deepwater drilling has destroyed the economics.

I think the biggest chances for material upside are:

1) They could reject the NPIs. I think the chances are probably less than 5%, but the upside would be huge.

2) They could sell North Sea/Octabuoy for more than $200 million. At just $350 million, the additional cash is materially positive for this investment

3) Netherland Sewell could sign off an a PV10 Value that is only a 25% discount or less to what ATPG has been using

Subject

RE: Current thoughts(?)

Entry

09/18/2012 04:12 PM

Member

ncs590

Keith Goodwin (CAO) gave an affidavit on Friday asking the court to allow payment of another $12 million or so to Technip so they will actually hook up the risers for Clipper before the boat leaves town at the end of the month. I assume this will get done, but the fact that it hasn't already been authorized injects a lot of uncertainty.

The DIP is definately too strict, which the judge basically objected to from the beginning. I assume this will all get worked out and everyone will get some extra fees for doing so, but there is a the risk that this goes into liquidation

On the plus side, the rising price of oil and the BP sale certainly help with the value of the assets. I think if they can get Clipper hooked up and get the CRO approved, the bonds should trade back into the 30s.

If they can get Octabuoy/Cheviot sold, I think this all gets a lot cleaner and there should be an end-point in sight. I was obviously early in writing this up, and certainly didn't anticipate such a sloppy bankruptcy. I had thought the second lien holders - who are a huge class and hired council and advisors well in advance of the filing - would have seen to it that they got a better DIP, but I guess that is wishful thinking . . .

As long as this doesn't somehow end up in liquidation, I think the bonds should be a good investment from here, but they are down a lot from the original write-up

Subject

RE: RE: Updates

Entry

10/19/2012 02:48 PM

Member

ncs590

Thanks Mack.

This investment has been a big frustration due to the restrictive DIP. I am basically waiting for clipper to come online, then will reevaluate. I think the valuation still looks attractive, but it's doesn't look like anyone is taking the lead for the second lien holders, so scary at this point

Subject

RE: RE: RE: RE: Updates

Entry

10/19/2012 04:36 PM

Member

ncs590

Mack, I agree. These bonds are screwed if clipper doesn't come online. However, from speaking to a guy at Cameron, I think there is a 95% chance that it comes online by the end of the year.

Subject

Clipper Update

Entry

10/26/2012 12:34 PM

Member

ncs590

from someone in the courtroom:

"After finishing with the EC work, ATP counsel gave a detailed report on Clipper. The umbilical work will be finished by Technip's Chickasaw vessel with completion and oilflow estimate on December 15th. "

Subject

RE: RE: Clipper Update

Entry

10/26/2012 04:59 PM

Member

ncs590

I think people are afraid it will turn into a liquidation. Those fears will persist until either Clipper comes online or some leadership emerges from the 2nd lien holders. There are a lot of distressed funds with nowhere to put money. I would expect one to get involved here and look to take fees for backstopping an exit plan